Time scope of the study is present time for theoretical background, in the period of 2012-2015 for budget deficit situation in Vietnam and the next period for the solutions.. Structure o
Research rationale
In recent years, state budgets have been crucial for fulfilling governmental functions, yet management shortcomings have led to persistent budget deficits globally This complex issue affects economic, political, and social spheres, with even economic superpowers like the United States grappling with similar challenges Consequently, budget deficits are a significant concern for states worldwide.
In the face of global economic fluctuations, such as volatile oil prices and rising inflation, addressing budget deficits has become an urgent priority for nations worldwide, especially in Vietnam.
Vietnam faces a significant challenge with its budget deficit, a common issue that necessitates innovative solutions and effective management strategies Understanding the underlying causes, consequences, and potential remedies for this financial shortfall remains a complex task that requires careful consideration and analysis.
For my graduation thesis, I have chosen the topic "The Budget Deficit in Vietnam from 2012 to 2015: Situation, Reasons, and Solutions." This study aims to analyze and assess the budget deficit in Vietnam during this period, while also proposing effective measures to improve the situation The research holds both theoretical and practical significance for addressing current challenges and guiding future fiscal strategies in the country.
Aims of study
This thesis aims to analyze the budget deficit situation in Vietnam and propose effective solutions for its reduction in the upcoming period It provides a comprehensive overview of the theoretical foundations related to budget deficit limitations, including definitions and causes, which serve as a reference for evaluating Vietnam's budget deficit The study examines the budget deficit reduction trends in Vietnam from 2012 to 2015, highlighting successes, limitations, and underlying causes to inform practical recommendations Ultimately, the thesis presents a systematic approach to reducing the budget deficit in Vietnam.
Research questions
The thesis will give answers to the following questions:
What is the situation of budget deficit in Vietnam over the period of 2012- 2015?
What are suggested solutions to reduce budget deficit in Vietnam?
Scope of the study
Scope of research field is the state budget deficit in both theoretical and practical sides
Time scope of the study is present time for theoretical background, in the period of 2012-2015 for budget deficit situation in Vietnam and the next period for the solutions.
Research methodology
The thesis primarily utilizes secondary data sourced from websites and organizational reports, with a significant emphasis on information extracted from MOF reports, which is then summarized into tables and figures.
The theoretical framework is abstracted from some books and websites listed for references.
Structure of the thesis
Apart from the Introduction and Conclusion, the thesis consists of three chapters:
Chapter I: Theoretical background of budget deficit
Chapter II: the budget deficit in Vietnam (2012-2015): Situation and Reasons
Chapter III: Solutions to budget deficit in Vietnam
THEORITICAL BACKGROUND OF BUDGET DEFICIT
Definitions
The state budget is a crucial component of the financial system, essential for the effective functioning of government operations As socio-economic development progresses, various definitions of the state budget emerge, reflecting its evolving significance.
Classical economists believe that state budget is an annual financial document describing government’s revenues and expenditures
Modern economists offer various definitions of the state budget Western economists view it as the largest centralized monetary fund of the state, while Chinese economists define it as an annual financial revenue and spending plan approved by law Russian economists see the state budget as a detailed list of the state's revenues and expenditures over a specific period In France, the state budget encompasses all accounting documents that illustrate the state's revenues and expenditures for the year Additionally, the Vietnamese State Budget Law, enacted in December, provides a legal framework for these financial practices.
On February 16, 2002, the state budget encompasses the total revenues and expenditures projected by authorized state agencies, which are implemented annually to fulfill the State's functions and responsibilities.
The state budget is a crucial financial activity of the government, encompassing the estimated revenues and expenditures for a specific period, typically a fiscal year It is approved by authorized state agencies and executed within that year to fulfill the State’s functions and responsibilities Additionally, the state budget illustrates the economic relationships formed through the allocation of financial resources between the State and other entities, based on the principle of direct non-reimbursement.
The state budget is a crucial element of the national financial system, encompassing various financial relationships It reflects the interaction between the State and residents, where residents pay taxes in exchange for social, medical, and educational subsidies, as well as poverty reduction support Additionally, the relationship between the State and the business sector is characterized by enterprises paying taxes while the State provides a supportive legal environment, infrastructure, and financial assistance Furthermore, the State fosters social organizations by supporting their activities Lastly, the financial relationship between the State and other states or international entities is evident through loans, grants, aid, and economic cooperation.
The state budget serves as a crucial component of the national financial system, encapsulating the economic relationships involved in the establishment, allocation, and utilization of the centralized monetary fund It plays a vital role in distributing national financial resources to fulfill governmental functions in accordance with the law.
A budget can be classified into three categories: balanced, surplus, and deficit A balanced budget occurs when government revenues match expenditures In contrast, a surplus budget arises when expected revenues surpass expenditures, while a deficit budget occurs when anticipated expenditures exceed revenues.
On the other hand, budget deficit is a status of financial health in which expenditures exceed revenues in government budget balance in a certain fiscal year
The imbalance between the value of social products generated and the state's expenditure highlights the complexities of budget management State budget revenue is derived from various sources, including taxes, fees, property leases, sales of national resources, and foreign grants Conversely, state budget expenditures encompass a wide range of areas such as economic development, culture, education, public health, social welfare, national defense, public security, foreign affairs, and other unforeseen expenses.
Calculation of budgetary balance
The state budget deficit, as defined by the international standards set by the IMF's Government Finance Statistics (GFS), is the difference between budget expenditures and revenues over a specific period, typically a financial year Essentially, the budgetary balance, also known as net lending, is calculated by subtracting total government disbursements from total government receipts within that timeframe.
Budgetary balance = Total budget revenues – Total budget expenditures
- Whenever the government spends less than it collects for a given year, it is running a budget surplus: budgetary balance > 0
- Whenever the government spends more than it collects for a given year then it is running a budget deficit: budgetary balance < 0
Budget revenues, often referred to as government receipts, encompass a variety of sources including taxes, fees, and charges They also consist of social contributions, grants, income derived from properties, and revenue generated from the sale of goods and services Additionally, other forms of revenue such as forfeits, compensations, and voluntary transfers (excluding grants) contribute to the overall budget revenues.
Revenues from taxes, a compulsory transfer to the government sector, account for a major proportion
The social contributions represent actual or nominal revenues received from employers or employees, independent laborers, dependents…
Revenue from properties is an income earned when the government contributes capital or delegates a right of using properties to units Interest and dividends are main components in this category
Revenues from sales of goods and services are from state units
Government spending encompasses a variety of expenditures, including employee salaries, wages, and social insurance, as well as costs associated with the procurement of goods and services It also includes investment in fixed assets, subsidies, aid programs, and social protection expenditures.
Employee expenditures, or remunerations, refer to the total payments made by the government to its employees for their work during a specific accounting period These expenditures encompass salaries, wages, and additional social contributions that the government pays to social insurance programs on behalf of its workforce.
Expenses for investment or procurement of goods and services to serve operation of the state apparatus or fulfill the tasks of socio-economic development
Subsidies are government financial aids provided to businesses based on their production scale, sales volume, or the value of goods and services they handle These payments support producers rather than consumers and are classified as regular transfers rather than investments In contrast, financial assistance given directly to households or non-profit organizations serving households is referred to as social benefits or other expenses.
Aids are optional regular or investment transfers from one government unit to another or to an international organization
Social protection, often referred to as social benefits, encompasses cash or in-kind transfers designed to safeguard individuals or specific groups from various social risks These social risks represent events or circumstances that can negatively impact household resources or income.
According to the International Monetary Fund's Government Finance Statistics, budget expenditures do not include principal repayments, and budget revenues exclude borrowings This regulation is grounded in a scientific rationale, accurately reflecting the inherent nature of budgetary items, as budget revenues and expenditures do not represent direct refund obligations or reimbursement responsibilities.
Determining state budget revenue and spending varies significantly between countries While most nations utilize a standard method for calculating budget revenues, some also incorporate on-lending into their revenue figures.
To measure government spending, majority of countries include interest payment, not principal repayment, while some others, Vietnam as an example, include principal repayment
A budget deficit is determined not only by the difference between a government's income and expenditure over a specific period but is also expressed as a percentage of GDP or total budget revenues This percentage can be calculated by dividing the deficit by either the GDP or total budget revenues and then multiplying the result by 100.
Classification of budget deficit
There are several bases to classify state budget deficit:
- Based on the role of government to budget deficit: active deficit and passive deficit
- Based on the difference between real and anticipated budget deficit: projected deficit and actual deficit
- Based on reasons for budget deficit: structural deficit and cyclical deficit
A budget deficit can have both positive and negative consequences, often classified into structural and cyclical deficits, which are widely recognized in modern finance Understanding these classifications is essential for analyzing the implications of budget deficits on the economy.
The structural deficit arises from government policies on taxes, social insurance, and spending in areas like education and national defense It persists throughout the business cycle, as government expenditures consistently surpass revenue, particularly tax income.
A structural deficit persists regardless of the business cycle phase, stemming from a fundamental imbalance between government revenues and expenditures Even during peak economic periods, when revenues are elevated, a country can still face a deficit This situation necessitates borrowing, which poses challenges for the government as it may need to continue accumulating debt, adversely affecting the debt-to-GDP ratio This ratio serves as a critical indicator of economic health and reflects the country's capacity to meet its debt obligations.
A cyclical (temporary) deficit is a deficit that is related to the business or economic cycle in terms of output level and national income
The business cycle refers to the fluctuating periods of economic expansion and contraction, which can span from months to years and lack a predictable pattern During economic downturns, rising unemployment results in decreased tax revenue, while increased welfare and social security payments can lead to budget deficits Ultimately, both cyclic and structural budget deficits contribute to an overall visible deficit, reflecting the total of either the deficits or surpluses.
Money-based values of structural deficit and cyclical deficit are determined as follows:
Actual budget: calculating revenues, expenditures and deficit in money in a certain period of time (usually a quarter or a year)
Structural budget: calculating government’s revenues and spending at potential output
Cyclical budget: the difference between actual budget and structural budget
Differentiating between the two types of deficits is crucial for evaluating the effects of fiscal policy—whether expansionary or contractionary—on the budget deficit This understanding enables the government to implement appropriate measures tailored to each phase of the economic cycle.
Causes of budget deficit
During an economic downturn, government revenues typically decline, while government spending often remains inflexible or even increases to address social and economic challenges, leading to a growing budget deficit.
In a rapidly growing economy, increased budget revenue often leads to a decrease in social welfare expenditures, such as unemployment insurance and subsidies for the poor This shift can enhance the government's fiscal balance, potentially reducing the budget deficit and even resulting in a budget surplus.
The budget deficit is shaped by the policy framework and socio-economic development objectives at different stages, often prevalent in developing countries due to the high demand for social investments, particularly in infrastructure In contrast, developed countries utilize budget spending as a macroeconomic adjustment tool; during recessions, increased government spending stimulates consumption and investment, while in a rapidly growing economy, reduced spending can help decrease the budget deficit and align economic output with its potential.
Unplanned expenses, such as those arising from national disasters like droughts, floods, and hurricanes, can lead to significant budget deficits by destroying assets and hindering economic activities, resulting in decreased taxable income Additionally, wars, whether planned or unplanned, present unpredictable costs and resource demands, complicating financial projections Furthermore, epidemics and unstable political situations can exacerbate budgetary pressures, ultimately contributing to a state budget deficit.
When estimating the national budget, governments must account for revaluation provisions, yet they often face uncontrollable risks To manage emergency situations and stabilize socio-economic activities, the state is compelled to increase expenditures, leading to an inevitable budget deficit that arises from the government's intentions.
4.2.1 Changes in budget revenue and expenditure structure
To achieve socio-economic objectives, such as offering tax incentives to attract investors and promote economic restructuring, a higher new economic structure may be established However, if government spending remains unchanged, this can lead to an increase in the budget deficit.
What the State implements policies to boost investment, stimulate consumption will make budget deficit increase significantly On the contrary, reducing State’s investment and consumption will concurrently reduce budget deficit
Ineffective budget management can lead to various adverse outcomes, including revenue loss from tax evasion, inefficient public investment, and the government's reliance on capital mobilization to stimulate consumption Additionally, it often results in a lack of emphasis on both current and investment expenditures, as well as an increase in government spending.
Three key factors influence budget balance techniques: the criteria for identifying budget deficits, the methods for calculating budget revenues and expenditures, and the timing of recording these revenues and expenditures.
4.2.3.1 The scope to determine budget deficit
Depending on the scope to determine budget deficit in terms of comprehensive deficit, government’s budget deficit, central budget deficit, results for budget deficit will be different
According to WB, public sector includes:
- Independent institutions: the State owns 50% of capital
When public sector institutions face insolvency and the government pays their debts without restructuring, the government ultimately bears the responsibility for these payments Consequently, these expenditures are reflected in the annual budget This approach leads to a comprehensive deficit that encompasses the entire public sector, serving as the most extensive measure of budget overspending.
The IMF advocates for a limited scope in determining budget deficits within the government sector, which includes all authorities except the central bank, regardless of its dependence on the government Each level of government operates with a state budget, supplemented by additional funds such as off-budget financial resources and social insurances, primarily financed by the state budget Consequently, the government budget deficit encompasses the deficits across all levels of government.
When assessing budget deficits, many countries focus solely on the overspending of central government activities, often disregarding local budgets, which are typically not permitted to exceed their limits This approach to calculating budget deficits aims to establish strict financial discipline, although it may limit management flexibility.
4.2.3.2 The methods to determine budget revenues and expenditures
When calculating the budget deficit, the government must decide whether to incorporate special revenues and expenditures alongside regular ones, as this choice significantly impacts the achievement of fiscal targets.
Establishing a clear timeline for recording state budget revenues and expenditures is crucial for the government to effectively assess the national financial situation and implement timely adjustments to enhance public resource utilization The timing of these records is influenced by the accounting principles in use, specifically cash accounting versus accrual accounting Under cash accounting, revenues are recognized only when cash is received, and expenses are recorded when they are paid In contrast, accrual accounting recognizes transactions at the point of order, delivery, or service occurrence, irrespective of actual cash flow This means income is recorded upon sale, while expenses are noted when goods or services are received.
Impacts of budget deficit on the economy
A state budget deficit can be beneficial for a country's socio-economic development up to a certain limit However, exceeding this threshold can lead to adverse effects on critical economic factors, including GDP growth, inflation, interest rates, trade balance, exchange rates, and overall macroeconomic stability.
5.1 Impact on interest rate and investment
Economic theory posits that a deterioration in budget deficits leads to an increase in interest rates This occurs because the government must raise interest payments on bonds to sell additional bonds Interest rates, free from administrative constraints, are determined by the interplay of supply and demand in the loan market, specifically the balance between household savings and business investments National savings, which encompass both private and public savings, represent the supply side, while investments illustrate the demand side Consequently, a fiscal deficit diminishes government savings, resulting in a decline in national savings, which in turn reduces supply and drives up interest rates in the loan market.
The increase in interest rates will ultimately diminish private sector investment, as excessive government spending can overshadow it This overspending results in a budget deficit, prompting the government to issue bonds and borrow funds, which consequently reduces the availability of affordable loans for the private sector.
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time
Public expenditures not covered by tax revenue can lead to excess aggregate demand and inflation, particularly when financed by an increased money supply A large budget deficit often prompts the government to request the central bank to print more money, resulting in more currency circulation and making goods more affordable This increase in demand for goods and services subsequently drives up prices If only a small portion of the fiscal deficit is financed through money supply expansion, inflation may not manifest; however, a consistently high portion over several years can lead to prolonged high inflation Such inflation is detrimental to the economy, causing issues like income redistribution and a decrease in money value, making the state budget deficit a harmful indirect factor for economic stability.
5.3 Impact on trade balance and exchange rates
Balance of trade is the difference between a country’s imports and its exports
A country has a trade deficit if it imports more than it exports
When a country's residents consume more goods and services than they produce, they often rely on imports If the government increases its spending without implementing measures to control private sector spending, this can result in a higher demand for imports, ultimately leading to a trade deficit.
A budget deficit leads to a decrease in national savings, which in turn reduces private investment and net exports Increased public spending results in total domestic consumption exceeding gross domestic product (GDP) To accommodate this rise in consumption, domestic production must increase; however, this also leads to a growth in imports, contributing to a trade deficit The impact of a budget deficit on the trade deficit is particularly pronounced in countries that heavily rely on imported materials for domestic production.
The budget deficit significantly influences the trade deficit by increasing the import of goods and services, which results in a capital outflow to foreign countries When a nation imports more than it exports, it initially pays in foreign currencies, which can later be invested in foreign assets such as shares, corporate bonds, government bonds, or real estate Consequently, in the context of a budget deficit, Vietnam is likely to become a net importer of goods and services while simultaneously becoming a net exporter of properties, leading to a growing volume of domestic real estate owned by foreign investors.
A budget deficit limits the availability of loans to the private sector, leading to an increase in interest rates If other conditions stay the same, higher interest rates can draw in international capital, boosting the supply of foreign currency and raising the value of the local currency However, this appreciation negatively affects exports.
In chapter I, the thesis focus on the analysis and synthesis of theoretical issues about state budget, budget deficit, causes and impacts of budget overspending Specifically:
A budget is defined as a crucial component of the national financial system, specifically reflecting the economic relationships involved in the creation, distribution, and utilization of the State's centralized monetary fund This fund is essential for the State to effectively perform its functions in accordance with the law.
- The concept of budget deficit, objective and subjective reasons for budget deficit, classification, calculation and impacts of budget deficit
CHAPTER II: BUDGET DEFICIT IN VIETNAM (2012- 2015): SITUATION AND REASONS
Situation of budget deficit in Vietnam
According to the statistics of ADB, Vietnam has run a consecutive budget deficit for over ten years and the deficit level is among the highest countries in the region
Vietnam's budget expenditures frequently surpass revenues, leading to a persistent budget deficit that has reached 5% of GDP in recent years, with a notable peak of 6.9% in 2009 This level of deficit is significantly concerning, as international standards suggest that a budget deficit of 3% of GDP is worrisome, while 5% is alarming.
Between 2007 and 2014, Vietnam saw a notable decrease in its deficit to GDP ratio, while the budget revenues to GDP ratio has consistently declined since 2010 According to the 2012 macroeconomic report titled “From Macroeconomic Instability to Restructuring,” published by the Economic Committee of the National Assembly, Vietnam has faced a persistent budget deficit over the past decade, which has been steadily increasing Specifically, the budget deficit, excluding principal repayments, averaged 2.4% of GDP from 2007 to 2010 and surged to 3.4% of GDP during the period from 2011 to 2014.
Figure 1 Budget deficit to GDP ratio in Vietnam (2012-2015)
Budget deficit in Vietnam has had a downward trend in recent years However, it is still at high level
In 2012, the global economy faced significant challenges, including the ongoing European sovereign debt crisis, the looming U.S fiscal cliff, and a slowdown in major emerging markets like China Despite numerous negotiations and summits, the Eurozone struggled to achieve stability, negatively impacting global economic growth While the American economy showed some improvement, its growth rate remained modest, with the unemployment rate declining to its lowest level in years.
Between 2012 and 2015, emerging economies like China, India, and Brazil experienced rapid growth; however, this growth was insufficient to prevent the anticipated decline of the global economy.
In 2012, Vietnam faced significant economic challenges, marked by a growth rate of only 5.03%, the lowest in a decade Despite efforts to stimulate growth through increased investment, the effectiveness of these investments remained stagnant, hindered by issues related to planning and management While total consumption demand showed improvement over 2011, its growth still lagged behind previous years Additionally, the total export value rose by 18.3% to USD 114.6 billion, primarily driven by the FDI sector, leaving many domestic enterprises struggling with the sale of their goods and services.
Table 1 State budget balance in 2012
A State budget revenues and grants 735,183
B Revenues mobilized for investment under Point 3 Article
D Total state expenditures (excl principal repayment) 1,106,108
G Budget deficit (excl principal repayment) -108,998
H Budget deficit (classified by Vietnam) -173,815
In 2012, the actual budget revenue fell short of expectations, totaling VND 735,183 billion compared to the planned VND 740,500 billion Current revenues constituted a significant 92.2% of the total revenue, while capital revenues, which included proceeds from the sale of state-owned properties, land user rights assignments, and grants, accounted for the remaining portion.
In early 2012, total state budget expenditures significantly exceeded expectations, reaching VND 913,647 billion, which was 7.14% higher than planned This variance was largely due to a substantial increase in investment and development expenditures, which surged by 49.34%, amounting to VND 88,812 billion.
The budget deficit in 2012, as a result, were VND 173,815 billion, equal to 3.4% of GDP, rising by VND 61781 billion compared to that in 2011and by VND33815 billion compared to the plan
In 2013, the global economy experienced a significant recovery, contrasting with previous recessions, as emerging and developing nations demonstrated robust growth The United States and Japan were on a positive trajectory, while the Eurozone began to emerge from its longest recession since 1999, with a GDP increase of 0.3% in Q2 2013 According to the IMF, the world economy's growth rate reached 3.1% in 2013, with developed countries growing at 1.2% (including the US at 1.6% and Britain at 1.4%), and developing countries achieving a growth rate of 5% (notably, China at 7.5% and India at 4.8%) compared to the previous year.
In 2013, the Vietnamese economy experienced positive growth, with a GDP increase of 5.42%, marking a hopeful trend despite being lower than that of neighboring countries The Consumer Price Index (CPI) reached a decade-low of 6.04%, reflecting effective macro-economic policies, particularly in monetary management However, the recovery was slow and unstable, with over 60,700 businesses, including foreign direct investment projects, ceasing operations by December Additionally, public debt rose to US$ 72.5 billion, accounting for 56.2% of GDP, indicating ongoing financial challenges for the country.
Table 2 State budget balance in 2013
No Items The 2 nd estimation
A State budget revenues and grants 822,000
B Total state expenditures (excl principal repayment) 961,930
D Budget deficit (excl principal repayment) -139,930
E Total financing (classified by GFS) 139,930
F Budget deficit (classified by Vietnam) -195,500
MOF recorded a government budget deficit to GDP ratio in the fiscal year
In 2013, the budget revenue reached VND 822,000 billion, surpassing the planned target at 100.73%, while budget expenditures were estimated at VND 961.9 trillion, exceeding the plan by VND 44,740 billion This marked a significant increase from the 4.8% estimated ratio in 2012, resulting in a growth rate of 5.45%.
In 2014, the global economy showed signs of gradual recovery, with inflation rates continuing to decline According to the January 2015 update from the International Monetary Fund (IMF), global economic output grew by approximately 3.3%, maintaining the same pace as in 2013 This growth was primarily fueled by emerging and developing economies, particularly China and India, while advanced economies also experienced some positive developments.
In 2014, Vietnam's economy demonstrated significant improvement, achieving a growth rate of 6.0%, surpassing the government's target of 5.8% This growth was primarily fueled by the manufacturing and construction sectors, with industry expanding by 7.1% due to foreign direct investment (FDI) that propelled manufacturing growth to 8.5% The construction sector also benefited from a recovery in property demand, growing at 7.1% Additionally, agriculture saw a boost, growing by 3.5% thanks to increased exports of fish and shrimp However, the services sector experienced a slowdown, with growth easing to 6.0% as tourism was impacted by a decline in visitors from China, resulting in a total visitor increase of only 4.0% compared to 10.6% in 2013.
Table 3 State budget balance in 2014
No Items The 1 st estimation
A State budget revenue and grants 846,400
No Items The 1 st estimation
C Total state expenditures (excl principal repayment)
E Budget deficit (excl principal repayment) 173,309
F Budget deficit (classified by Vietnam) 224,000
In 2014, the Ministry of Finance (MOF) reported that total state budget revenues reached VND 846.4 trillion, surpassing the planned target by 108.1% Notably, revenue from crude oil amounted to VND 107 trillion, exceeding projections by 25.6% Meanwhile, total budget expenditures were estimated at VND 1,019.7 trillion, which was 101.3% of the planned budget.
The significant decline in global crude oil prices, dropping by as much as 50%, has raised concerns in Vietnam, where crude oil revenue still constitutes over 10% of total budget revenues This reliance on oil revenue exacerbates the state's budget deficit, making the financial situation increasingly precarious.
The global economy faces challenges in achieving momentum, with high-income countries still dealing with the aftermath of the financial crisis, while emerging economies exhibit reduced dynamism compared to previous years.
Reasons for budget deficit in Vietnam
Firstly, because Vietnam’s economy has been in a prolonged recession, it was necessary for the Government to release the stimulus package
In 2012, a total of 54,261 enterprises closed down, as reported by the Administration of Business Registration, MPI The government provided a support package of VND 29 trillion to assist struggling businesses, which included VND 16 trillion for tax extensions, VND 4.5 trillion for tax exemptions, and VND 1.5 trillion in rental support for commercial companies.
In 2013, a staggering 60,700 businesses declared bankruptcy, as reported by the Administration of Business Registration, MPI In response, the government launched a VND 30,000 billion stimulus package for housing loans, which commenced in June 2013 and concluded its disbursement period on June 1, 2016 However, due to the unforeseen outcomes of this initial package, the State Bank of Vietnam (SBV) has proposed an additional credit package of VND 50,000 billion aimed at supporting the commercial housing sector, potentially to be implemented in the near future.
This policy of stimulus package is a reason for high expenditures of the Government in the current recession period, which could generate a budget deficit
Secondly, natural disasters, namely, storm and flood caused unexpected consequences The government had to spend more to overcome these difficulties
Society constantly faces various risks, including natural disasters, epidemics, and human-induced threats like wars and terrorism In Vietnam, the impact of natural disasters is particularly severe, with events occurring more frequently and becoming increasingly complex, exemplified by storms such as ConSon in 2010 and Haiyan.
(2013), the floods in the Central Region (2011, 2013) and several other small and big disasters
There were shortcomings in the management of revenues and expenditures, causing losses and wastage
Firstly, the state apparatus has been growing excessively and become more and more bloated, costs for officials and civil servants’ salaries account for a large portion of state budget
Since 2011, the government has raised the base salary from VND 730,000 to VND 1,150,000 per month, marking a 57.5% increase Additionally, high current expenditures in our country are influenced by budget spending that considers input factors, staffing levels, and projected workloads.
On August 8, 2007, the Government enacted Decree No 132/2007/ND-CP regarding downsizing within public sectors However, after five years of implementation, the Ministry of Interior revealed shocking statistics in 2012, indicating a significant increase in the total number of officers and civil servants from the Central to District levels by the end of that year.
In 2013, the nationwide payroll increased by 42,000 people compared to 2012, with a significant rise of 14,000 at the communal level Provinces like Nghe An and Thanh Hoa reported high payroll figures, with 18,000 and 17,300 employees, respectively In a notable incident in Quang Ninh, Mr Nguyen Van Doc, the President of the Quang Ninh People’s Committee, humorously remarked on the bloated state apparatus, highlighting that taxpayer contributions were insufficient to cover officer salaries in 2014.
During the 11th session of the XIIth Quang Ninh People’s Council in 2013, it was reported that each commune in Quang Ninh has an average of about 200 individuals receiving state payments Notably, Hong Hai Ward in Ha Long City has a significantly higher number, with 475 individuals on the payroll In Ba Che District, there are 120 households comprising 521 residents, of which 110 individuals are supported by the state budget.
Secondly, Vietnam’s economy has been developing, the State advocates to promote investments
Vietnam's economy, starting from a low baseline, is under pressure to grow rapidly, making capital investment in economic development a popular growth model With non-state economic sectors still emerging and characterized by limited professional qualifications and managerial skills, state investment is crucial, representing approximately 45 percent of total social investment According to the World Bank, Vietnam stands out as one of the leading countries in investment, dedicating over 40 percent of its GDP to this endeavor.
To foster socio-economic development and enhance integration and cooperation while mitigating the risk of falling behind other nations, the Government has made significant financial investments in projects related to infrastructure, education, and healthcare.
Thirdly, bureaucracy and corruption are common concerns that lead to the revenue loss
Corruption in Vietnam stems from a lack of transparency, accountability, and media freedom, coupled with low salaries for government officials and insufficient mechanisms for holding them accountable The 2012 Transparency International Corruption Perceptions Index ranked Vietnam 123rd out of 176 countries Notably, the Vinashin graft scandal remains prominent, with former chairman Pham Thanh Binh sentenced to 20 years in prison for violating state regulations, leading to significant financial losses of nearly VND 900 billion This incident is part of a broader pattern of corruption among state-owned enterprises, exemplified by Vietnam National Shipping Lines (Vinalines), which incurred losses of approximately VND 1,685 billion (US$ 81 million) between 2009 and 2010 under Duong Chi Dung's leadership, amidst ongoing scrutiny These cases, alongside violations by other entities like Vietnam Coal and Mineral Industries Group and Vietnam Electricity Group, highlight serious concerns regarding the integrity of state-run conglomerates.
Fourthly, loss of tax revenue has been running because of tax evasion situation
Taxes serve as the primary and sustainable source of budget revenue, alongside other income sources like natural resources, state enterprise borrowings, and grants However, shortcomings in our legal system and management practices have created opportunities for individuals and organizations to engage in tax evasion, resulting in significant losses to the state budget Currently, various forms of tax fraud are prevalent in Vietnam.
Many taxpayers today engage in sharp practices by maintaining two separate bookkeeping systems: one that accurately records all economic transactions for internal purposes and another that only partially reflects these transactions for tax declarations This behavior is particularly prevalent in industries such as retail, dining, hospitality, construction, and small-scale production, making it challenging for tax authorities to assess the extent of tax revenue loss.
A number of tax evasion cases have been uncovered recently For instance, the Vietnam credit information and rating company Ltd had a tax evasion of VND
1028 million thanks to not bookkeeping; ENV telecom sold goods and services without recording, causing a tax loss of VND 37 billion
Illegal cross-border trading of banned goods, particularly tobacco, has become a significant issue in Vietnam, with Mr Vu Van Cuong, Chairman of the Vietnam Tobacco Association, noting a 30-40% increase in contraband tobacco in 2014 compared to 2013 The high taxation on tobacco, including a 65% excise tax, 10% VAT, and 135% import tax, has resulted in a staggering budget revenue loss of over VND 9,000 billion in 2014 According to an Oxford Economics report, Vietnam emerged as the leading market for contraband tobacco among 14 surveyed Asian countries, highlighting the urgent need for effective measures to combat this growing problem.
Enterprises are engaging in fraudulent selling transactions primarily through short-exporting, particularly in provinces adjacent to Cambodia They exploit the region's numerous interconnected rivers to reroute cargo: after completing export procedures, they bring the goods back to Vietnam without officially crossing the border, subsequently initiating re-export procedures This scheme often involves collusion with foreign partners to facilitate VAT reimbursement requests Consequently, there has been a suspicious surge in export turnover from Vietnam to Cambodia, accompanied by a rapid increase in VAT reimbursements, which rose by 196.4% in 2011 and 190% in 2012.
Businesses often engage in fraudulent purchasing transactions by using counterfeit invoices and signatures, leading to significant financial discrepancies According to the General Administration of Customs, approximately 10,000 goods samples are analyzed annually, with around 53% of these improperly declared, resulting in a tax revenue loss of 7.4%.
Chapter II focuses on analyzing the current status of budget deficit in Vietnam in the period of 2012 until 2015 The content keeps abreast of theoretical issues mentioned in chapter I
For an actual and objective analysis base, this chapter starts with the general contents, assessing the socio-economic issues prominent in the period
SOLUTIONS TO BUDGET DEFICIT IN VIETNAM
Expenditure reduction
To address fiscal deficits and inflation, governments can temporarily reduce public spending, which is crucial for maintaining economic stability Effective management of expenditures involves implementing strict and economical methods to ensure financial responsibility.
The government must conduct comprehensive research on overall planning and make informed investment decisions It is crucial to enhance management practices before, during, and after each project to ensure success The efficiency of projects serves as a key criterion in evaluating investment decisions.
The government must clearly define the scope and establish reasonable priorities for state budget expenditures, assessing which items can be cut or adjusted By practicing thrift in public investment, the government should focus on effective projects that drive significant socio-economic breakthroughs while eliminating or reducing funding for inefficient initiatives Additionally, current state expenditures should be scrutinized and reduced if deemed unnecessary, ensuring a more efficient allocation of resources.
Thirdly, the government should implement public administration reforms, cut down the staff to mitigate the cumbersome, bureaucracy and enhance management efficiency of the state apparatus
In recent years, Vietnamese Government has primarily reduced investment and development expenditures Besides, current expenditures have still increased steadily The government should, therefore, control and tighten current expenditure effectively.
Revenue increase
To address budget deficits, the government must consider increasing tax revenues, which involves not only raising tax rates but also enhancing the overall tax system to minimize tax loss While theoretically, higher tax rates can boost revenues quickly, the actual effectiveness of this approach depends on the economy's resilience, the efficiency of the tax collection management system, and the performance of both direct and indirect taxes Additionally, preventing tax loss is crucial; the government should diversify taxable entities, reform the tax collection framework, and enforce stricter management of grants, fees, and charges to optimize budget revenues.
To enhance revenue without raising tax rates, solutions must align with investment development and business expansion Key strategies include refining tax policies by minimizing rate discrepancies and reducing tax incentives, ensuring accurate and comprehensive collection to support economic growth while stabilizing the revenue-to-GDP ratio Additionally, improving indirect taxes such as value-added tax, excise tax, and import-export tax in line with international standards is essential This includes diversifying taxable entities, reducing the number of low tax rate exemptions, and aligning personal income and property taxes with market economy developments.
In 2009, the Vietnamese Government addressed its budget deficit by raising personal income and real estate taxes, while also limiting tax exemptions and preferences for newly established enterprises Between 2012 and 2014, tax revenues consistently grew, largely driven by increases in corporate income tax and value-added tax.
Table 6 Tax revenue situation in Vietnam (2012-2014)
Recently, the State has revised value added tax rates, unifying the tax on mechanical products for production and consumption to a flat rate of 10%, due to challenges in distinguishing between the two categories Additionally, the highest value added tax rate continues to apply to certain products, including basic chemicals, automatic handling machines, and coal.
Vietnam's state budget heavily relies on crude oil exports and international trade, making it vulnerable to fluctuations in the global market, which can lead to budget deficits To address this issue, the Vietnamese government should reduce its dependence on these unstable revenue sources Additionally, there is significant potential to enhance tax revenues, particularly from personal income tax, which currently constitutes only 2% of the total budget, compared to over 20% in developed countries.
Raising income tax rates within acceptable limits can boost state budget revenues and help reduce the budget deficit This approach not only increases government funds but also encourages businesses to expand, leading to greater profitability Consequently, increasing income tax can serve as a catalyst for economic growth.
Raising taxes can be a challenging and expensive process with long-term implications Increasing direct taxes may ultimately reduce state budget revenues and encourage tax evasion The Laffer Curve, developed by Arthur Laffer, illustrates the relationship between tax rates and government tax revenue, highlighting the potential consequences of tax increases.
The Laffer Curve illustrates the relationship between tax rates and tax revenue, highlighting two key effects of taxation Initially, as tax rates rise from low levels, government tax revenue increases However, T* marks the optimal tax rate at which maximum revenue is achieved while individuals remain motivated to work Beyond this point, higher tax rates can lead to decreased work effort and, consequently, reduced tax revenue Ultimately, Laffer posits that a 100% tax rate would result in zero income tax collected, as there would be no incentive for individuals to earn income.
Therefore, the government should raise tax rates to a certain level and simultaneously prevent tax loss in order to limit budget deficit.
Borrowings
To address budget deficits, governments often resort to public loans to cover additional expenses not met by current revenues By seeking supplementary financial resources, governments engage with individuals and corporations that have excess liquidity, allowing these entities to lend money to the state and become its creditors.
There are two main borrowing forms of the government: bond issuance and direct borrowing from domestic and oversea sources
Figure 4 Forms of government borrowings
Issuing bonds Forms of Borrowing directly borrowing
When a country experiences a budget deficit, it borrows money from its residents to cover the shortfall between government spending and revenue The primary method for this borrowing is through the issuance of government bonds, which are debt securities issued by the national government These bonds allow the government to raise funds from residents, socio-economic organizations, and banks, typically promising periodic interest payments and the repayment of the principal amount on a specified maturity date Government bonds are generally denominated in the country's own currency, making them a key financial instrument for managing national debt.
To improve the efficiency of domestic borrowing, here are some suggestions:
The government should consider extending loan terms to allow for longer payment periods, which would enable investors to maximize the efficiency of their capital Additionally, it is essential to restrict short-term loans for long-term projects to ensure sustainable investment practices.
Secondly, the government needs to continue improving mechanisms, policies and laws to expand the scale of exploring idle capital in the economy
In Vietnam, the Government authorizes the Treasury to issues bonds in the forms: Treasury bills; Treasury bonds and construction bonds specified in Decree
According to No 01/2011/ND-CP dated January 5, 2011, government bonds are issued via auctions, underwriting, issuing agents, and retail bonds As per Resolution 78 from the National Assembly regarding the 2015 state budget estimation, starting in 2015, government bonds are required to have maturities of five years or longer, and short-term loans are prohibited for financing the state budget deficit, thereby minimizing debt rollover loans.
The government's strategy to finance budget deficits without increasing the monetary base or depleting foreign exchange reserves is an effective measure for controlling inflation By utilizing temporarily idle capital within the economy, this approach reduces reliance on foreign countries and avoids adding to net foreign debt, as it does not involve overseas borrowing Additionally, it allows the government to bypass tax increases while stimulating the economy through public spending, which can theoretically lead to increased tax revenue from thriving businesses and taxpayers.
In countries facing high inflation, such as Vietnam, the real value of government bonds declines rapidly, making them less appealing to investors While the government may leverage its authority to compel other entities to retain these bonds, prolonged reliance on this strategy could damage its reputation and hinder future fundraising efforts through this avenue.
Foreign borrowings are crucial for financing Vietnam's budget deficit, as domestic borrowing is constrained by the country's savings The Vietnamese government can address this deficit through grants or by securing loans from foreign governments and international financial institutions like the World Bank, International Monetary Fund, and Asian Development Bank.
Vietnam's debt structure has become increasingly unsustainable, particularly as the country is now classified as a middle-income nation, leading to a reduction in access to preferential ODA loans A significant milestone occurred on May 8, 2013, when the Vietnamese Government signed an ODA loan agreement with the Hungarian Government for EUR 9.99 million at the Ministry of Finance headquarters.
To address budget deficits without triggering inflationary pressures, the government can leverage substantial capital sources and favorable interest rates By opting to borrow funds from international markets, the government can mitigate the crowding out effect, ensuring a more stable economic environment.
Both domestic and foreign borrowings incur a "coupon interest rate," and increased government borrowing leads to greater debt burdens Prolonged budget deficits can create a cycle where overspending results in more borrowings, which in turn necessitates higher interest payments, ultimately exacerbating the budget deficit, as seen in the USA during the 1980s Additionally, excessive borrowing may force the government to raise taxes in the future Thus, effective management of public debt is crucial for balancing the state budget Establishing a state bond market is vital, as it enables the government to finance spending independently of the central bank.
Figure 5 Public borrowing situation in Vietnam 2011-2012
Source: Key Indicators for Asia and the Pacific (ADB, 2014)
Money issuance
During economic recessions, governments may finance budget deficits by creating new money through central bank resources This process involves issuing new currency to cover excess public expenditures that lead to deficits However, it is crucial to carefully evaluate the amount of newly-created money to ensure it remains within objectively justified limits, considering the economy's size and characteristics.
When additional money is issued to cover a budget deficit, its impact on the economy depends on how these funds are utilized If the resources are directed towards investment projects that boost output, the initial increase in the money supply will correspond to a rise in the availability of goods and services, preventing a permanent increase in price levels Conversely, if the funds are used to finance final consumption without contributing to GDP growth, it will lead to a lasting increase in prices, resulting in inflationary pressures from the monetary financing of the budget deficit.
This quick and easy solution allows the government to finance its deficit spending without incurring debt or interest payments By printing new money, the government can stimulate private spending without crowding it out, leading to an increase in overall consumption and investment When the economy is below full employment, government spending financed through money issuance has no negative impact, making deficit spending a justified approach.
Financing budget deficits through money issuance tends to be inflationary, as governments often allocate newly created funds to unproductive expenses This practice increases the money supply, leading to demand inflation, especially when the economy is near full employment and too much money is chasing a limited supply of goods Therefore, during periods of high inflation, it is advisable for the government to refrain from using this method to finance budget deficits.
Renewing the method of budget deficit calculation
Selecting an appropriate method for calculating budget deficits significantly influences the outcome Accurate measurement reveals the true imbalance between revenues and expenditures, allowing for a precise deficit ratio This ensures that the structures of receipts and disbursements incorporate items that align with their correct nature.
Unlike some developed countries, Vietnam includes both principal repayment and interest payments in its state budget, which blurs the lines between financial and credit operations Separating principal repayment from budget expenditures is essential, as it relates to direct reimbursement obligations that do not align with the state budget's purpose This distinction promotes transparency in managing budgets and debts, while also improving the quality of the State’s financial management in accordance with international practices Such separation will facilitate Vietnam's exchange and integration with the global economy, aligning with broader trends of international integration.
Determining the proactive and rational deficit
To effectively finance the budget deficit, especially in the context of Vietnam's focus on economic development and significant spending needs, the government must establish a reasonable deficit level that avoids negative impacts on socio-economic life and promotes stable, sustainable growth Determining an appropriate and proactive deficit requires consideration of four key factors that align with the objectives of economic development.
- Demand for necessary investment capital to obtain the goal of planned economic growth
- The rate and amount of investment capital which can be mobilized from all economic sectors
- The proportion and volume of investment capital which the budget assumes
- The ability to raise capital from sources of budget deficit financing, borrowings and debt payment, debt balance, rate of government debt, fluctuations of interest rate and exchange rates…
The Vietnamese government's economic development plan aims to achieve high and stable growth, despite facing limited investment resources and a higher budget deficit compared to other countries This deficit, while significant, is deemed reasonable under current circumstances To navigate this challenge, the government must enhance its ability to forecast economic conditions, which will inform long-term and medium-term fiscal policies Determining the appropriate budget deficit limit is complex and contingent upon Vietnam's unique conditions and the methodology used for calculation.
Chapter III addresses the budget deficit issue by proposing four primary solutions: reducing expenditures, increasing revenues, utilizing borrowings, and issuing money Additionally, it suggests two supporting measures: updating the budget deficit calculation method and establishing a proactive, rational approach to deficits Each solution is analyzed for its advantages and disadvantages, enabling the Government to make informed decisions based on specific contexts.
Governments are consistently troubled by high and prolonged budget deficits, as these deficits are closely linked to rising public debt Addressing budget deficits is a delicate matter that impacts both the economy and the country's sustainable development Consequently, each nation must implement effective strategies to mitigate this issue and foster financial stability.
In Vietnam, the budget deficit, while not classified as high by international standards, has persisted annually, creating pressure on economists, managers, and the government To address this ongoing issue, the government has various effective measures at its disposal; however, the choice of solution depends significantly on the prevailing economic conditions and financial policies of each period, as each option presents its own advantages and disadvantages Therefore, it is crucial for the Vietnamese government to carefully evaluate these factors to implement the most appropriate solutions for the current situation.